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Comprehensive measures for the current domestic stock market
The domestic stock market has recently experienced complicated development, especially after Tet holiday with consecutive declines, bringing the VN-Index to 687.10 on February 22.
There are various reasons for the decline of the stock market, having an effect on both supply and demand, in which the psychological element plays a significant role.
It is urgent to re-stabilise the domestic stock market within the current context. This requires comprehensive measures by ministries and sectors on various fields to control inflation, the credit market, the real estate market, financial policies and government expenditures.
The domestic stock market is still in its early stage of development but it is becoming an important economic institution with a total market capitalisation of over 41% of GDP. Last year, capital mobilisation through the stock market hit VND 120 trillion.
Currently, there are nearly 280 listed stocks on the market and over 300,000 investors that have opened stock accounts. However, the Vietnamese stock market also include the participation of thousands of joint stock companies which have yet to be listed and their shareholders.
Thus, the instability of the stock market will directly affect the mobilistion of capital for enterprises, the equitisation process, the general growth of the economy in the coming years and especially the confidence of the foreign and domestic investors.
To stabilise the domestic stock market, the following issues should be dealt with:
Some macro economic targets such as inflation and economic growth should be adjusted so as to be suitable to the current state of the world economy and the difficulties inside the country.
The control of inflation through tightening fiscal policies is necessary to ensure micro-economic stability. Inflation is currently due to the accumulated growth in the supply of cash as well as credit growth over the past few years and the weaknesses and low effectiveness in production and investment by enterprises. The easy mobilisation of capital by businesses on the unofficial market, leading to widespread investment, has led to declining effectiveness of enterprises and is also another factor affecting inflation.
In order to control inflation, it needs not only efforts by banks but also the co-ordination of ministries, sectors and localities, including the control of activities to mobilise and use of mobilised capital, investment activities as well as government expenditure.
The latest measures to control inflation by the State Bank of Vietnam need time to be effective. Measures to limit credit and increase compulsory reserve ratio are necessary and appropriate.
With regard to the exchange rate, the Vietnamese dong should be increased to help reduce the pressure of buying foreign currency, encourage imports, thus helping reducing pressure for inflation and promote reforms in export activities.
The increase of interest rates have been used, but it should be calculated thoroughly so as not to have a strong impact to growth.
Currently, international interest rates are lower than the domestic ones. If the interest difference is too big, plus the keeping of the Vietnamese dong does not increase, this will encourage the flow of foreign currency to bonds, especially short-term bills, thus increasing the pressure to buy foreign currency.
In regards to credit control, the SBV is successfully carrying this out as part of an effort to control inflation. However, thorough consideration should be made so as to support the domestic stock market. Normally, other countries loosen credits to stock market investment when the market declines and tighten it when the market becomes too hot.
The bank’s action to the real estate market is appropriate. However, comprehensive measures are needed to control the real estate market. The control of this market should also be carried out step-by-step, avoiding the impact to banks and enterprises.
With regard to foreign currency flows, along with the measure to increase the value of the Vietnamese dong, the SBV should boost the buying of foreign currency for at least one month. The SBV should also withdraw cash from circulation through the issuance of bills and bonds.
Foreign ownership ratios in listed companies remains 49% while that in banks should be increased to 30-35% to encourage development of the stock market. Room for foreign investors in unlisted companies can either be increased from the current 30% to 40% or various ratio depending on different categories of enterprises could be applied.
Wholly foreign-invested fund management branches and companies should soon be allowed to operate in Vietnam to support “demand” in the stock market. However, the capital mobilised from abroad by these companies should be managed thoroughly.
Within the current context, if initial public offerings (IPOs) of major State-owned enterprises are made at this moment, they will struggle to be successful and there will be a strong impact on the market. However, the delay of IPOs will also slow down the process of reforming State-owned enterprises and the current renovation process.
Thus, enterprises should consider offering their shares to strategic investors through negotiations. If enterprises select the right strategic investors which pledge to hold the shares for at least three years, supplies of shares to the market will be lessen while enterprises will be supported in business management for more effective operations.
Enterprises are requested to announce publicly and specifically information about themselves and the assessment of enterprises’ value should be done by professional organisations in an open and transparent manner so as to avoid losses in State-owned property.
A market for trading shares of unlisted popular companies should soon be put into operation at the Hanoi Securities Trading Centre to increase the management and liquidity for the OTC market.
The State Securities Commission should also strengthen its inspection activities to discover violations and issue appropriate penalties.
Currently, the domestic stock market is undergoing fundamental adjustment. Prices of securities have become more attractive. The Vietnamese economy is continuing to grow. Investment by foreign investors on the official market has been maintained (hitting US $8.5 billion at the end of January 2008, compared to US $6.5 billion in October 2007). Business performance by listed companies is good in general. Investors should not over-react to news or the efforts to control inflation by the SBV.
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